E*TRADE SUIT: BROKER FELL SHORT OF AD CLAIMS; COURT WILL DECIDE IF 'PUFFERY' IS GOOD DEFENSE

A Cleveland judge will soon decide how much an online brokerage must live up to its advertising.

A lawsuit now before the Court of Common Pleas of Cuyahoga County charges that E*Trade failed to keep promises of fast, reliable service it made in its ad campaign. The suit, filed in March on behalf of E*Trade client Truc Hoang, Westlake, Ohio, contends that several service outages cost clients of the online brokerage money when they could not complete trades quickly.

In its motion to dismiss, E*Trade cites other cases in which advertising claims were considered "mere 'puffery,' sales talk or 'talking big' and are immaterial as a matter of law."

"It is absolutely fine for companies to extol the virtues of their products and services in advertising in an optimistic and positive tone," said an E*Trade spokesman. "Ours is well within those bounds. We would never be deceptive."

He said the plaintiff's case is "without merit."

The suit claims service interruptions in February caused Ms. Hoang to pay more for stocks than she would have if her trades had been completed when she first tried to connect with E*Trade. Lawyers for Ms. Hoang have asked the court to certify the complaint as a class-action suit, arguing other E*Trade clients suffered the same problems.

PREDICTABLE

David Webster, the attorney representing Ms. Hoang, said E*Trade's outages were a predictable result of a computer system that was not equipped for the kind of growth it had to handle.

E*Trade experienced a growth spurt during the fiscal year ended Sept. 30. Its average daily volume rose 148% to 68,484 trades, from 27,620 in fiscal 1998, according to a press release on the E*Trade Web site. The site also said its account total nearly tripled to 1.55 million from 544,000 accounts in fiscal '98.

Mr. Webster claims that rather than addressing those growing pains by upgrading its technical infrastructure, E*Trade concentrated on marketing its service to add new clients.

"They knew they were facing computer outages if they didn't upgrade . . . [but] they continued to spend huge amounts of money on advertising," he said. "As a result, the computers crashed."

The E*Trade spokesman responded that "Our No. 1 priority is to service our customers."

E*Trade broke a new ad campaign in April that used humorous messages to contrast online investing with traditional brokerages. One spot shows a downtrodden broker cold-calling prospects, with the message: "If your broker is so great, how come he still has to work?"

GOODBY WORK

It was the first E*Trade work from Goodby, Silverstein & Partners, San Francisco, which won the $100 million account in March.

America Online was the target of a similar class-action lawsuit in January 1997, after it instituted a $19.95 unlimited-time rate that caused usage to swell and made the system inaccessible to many subscribers. AOL quickly settled the suit, but not until after rivals such as CompuServe and Prodigy had baited the company in their TV ads.

"In America Online's situation, people were inconvenienced," said Mr. Webster. "In this situation, people lost money."

The suit seeks an unspecified amount in punitive damages.

E*TRADE'S RESPONSE

As a response, E*Trade petitioned the court to force both sides into arbitration but was turned down. The company appealed, and filed a motion to dismiss the charges, citing several cases that established advertising "puffery" was not legally actionable.

Additionally, the motion challenged the Ohio court's jurisdiction over E*Trade, a company based in Palo Alto, Calif.

Judge Frank Celebrezze Jr. has not yet ruled on dismissal motions or on Mr.